Historic Midterm Sweep: Will Iran War End, Stocks Keep Rising? | Matt Gertken

Matt Gertken · BCA Research

Face-saving US strikes on Iran will cause a brief oil price spike before Trump exits the war.

Trump cannot withdraw immediately without intimidating Iran and showing consequences, so over the next three months he will conduct some strikes. These are face-saving maneuvers designed to secure a more durable ceasefire than the June ceasefire, with a planned exit afterward. The strikes can cause a brief spike in oil prices before the blockade is withdrawn and oil falls.

“So what's likely to happen in the next three months is the president will conduct some strikes, but they're face saving maneuvers, and he's planning to exit. That can cause a brief spike in the oil price.”at 12:38

Matt Gertken · BCA Research

Iran can hold oil near $90 a barrel for two years by keeping ceasefires and shipping fragile.

Iran is not finished and needs to defend a $90 per barrel oil price floor over the next two years. As long as ceasefires are not fully successful or implemented, shipping is occasionally disrupted, and infrastructure is sporadically attacked, oil can stay around $90. Keeping the conflict simmering also keeps American voters aggravated and makes a Democratic 2028 win more likely, which Gertken argues is central to Iran's strategy.

“Iran is not. They need to defend a $90 per barrel oil price as a floor under the oil price. They need to defend that over the next two years.”at 16:24

Matt Gertken · BCA Research

Today's stock rally reflects resolved election uncertainty and expected Trump moderation on Iran.

The rally is a reflexive response to the uncertainty being resolved, and there is anticipation that Trump will change his Iran policy because the electoral rebuke was tied to gasoline prices from the war. If he moderates the war, oil prices would fall, which benefits gold and equities and lowers bond yields.

“But I also think that there is some anticipation that the president will change his policy toward Iran because the rebuke that he suffered in the election is so clearly tied to gasoline prices in the war there”at 4:23

Matt Gertken · BCA Research

Democrats' midterm gains raise their 2028 odds by broadening the electoral college battleground.

Democrats won in red states such as Kansas, Iowa, Texas and South Carolina, which were thought to be locks in the electoral college. Because an open 2028 race has no incumbent, Democrats now have more paths to electoral votes. Public opinion shifted so Republicans lost gerrymandered seats despite more funding, which suggests the red-state electoral college advantage that many assumed is not durable.

“it increases the odds of democratic victory in 2028 simply because there's more options now for democrats to win electoral votes.”at 6:21

Matt Gertken · BCA Research

A Hormuz ceasefire is easy to get by withdrawing the blockade; a nuclear deal is hard.

Prediction markets put a US-Iran deal by March at only about 15%, and that probability fell after the midterm results. Gertken argues the market question concerns a nuclear deal, not a Hormuz ceasefire. The president needs a Hormuz ceasefire and can get it by withdrawing the blockade, since Iran wants to sell oil. A nuclear deal that stops uranium enrichment is far harder. Israel will push to finish the nuclear program, and Trump lacks the support to topple the regime, so the US will likely rely on the threat of bombing nuclear plants again if enrichment restarts.

“The president is in a position where he really needs the ceasefire in Hormuz, and he can get it by simply withdrawing the blockade. Iran will allow oil to flow because it's in their own interest to sell oil. That deal is very easy to get.”at 13:57

Matt Gertken · BCA Research

Democrats cannot kill the AI capex boom through Congress because Trump would veto anti-AI bills.

Democrats controlling Congress cannot stop the AI capex boom because the president will veto any legislation that would do so. Gertken expects the AI capex boom to keep going, with protection from onerous regulation a key part of Trump's economic agenda, which the economy will rely on over the next two years.

“I don't think Democrats are gonna be able to kill the AI CapEx boom simply by controlling congress because the president will veto anything that would do that.”at 17:34

Matt Gertken · BCA Research

US expansion should continue, though growth may slow over the next two years.

The labor market is firming up and US GDP growth is solid, so there is no broad economic failure. Gertken expects the economy to keep moving along and the global economy to keep expanding, even if growth slows over the next two years. This supports the view that Iran can keep oil near $90 without a collapse in demand.

“the labor market is firming up, and US GDP growth is fine. ... It may slow down over the next two years, but it's probably gonna continue to expand”at 17:34

Matt Gertken · BCA Research

US inflation stays structurally high: tariffs held near 10% and deficits unchecked.

Trump cannot slash tariffs back to 2% and will keep them effectively at 10%. He cannot cut the budget deficit by raising taxes or cutting spending because Democrats won't cut spending and he doesn't want to raise taxes. Together, tariffs and a large deficit leave the US in a structurally inflationary context that is hard for Trump to escape, and it is not good for Republicans heading into 2028.

“So we're looking at a structurally still quite inflationary context, and it's not great for Republicans in 2028, and it's very hard for Trump to get out of it.”at 18:28

Matt Gertken · BCA Research

Democratic spending bills raise the deficit, which is inflationary and could push the Fed to overtighten.

Democrats with both chambers can pass popular legislation such as expanded ACA credits, Medicare spending and drug price negotiation, Medicaid expansion, and subsidized housing. Trump will accept these because he won't raise taxes and tariffs are unpopular revenue. The budget deficit therefore rises incrementally, which is inflationary. Trump can argue the Federal Reserve will fight inflation, but the Fed then has to play catch up to keep inflation expectations anchored, raising the odds it overtightens. The alternative of vetoes, shutdowns and a frozen fiscal backdrop is less inflationary but unpopular.

“So the point here is that the budget deficit at least incrementally goes up. It increases, and that's inflationary.”at 19:47

Matt Gertken · BCA Research

A French right-wing populist government will cut spending in April-May 2027, calming the bond market.

France spends too much and the left wing is running riot, so a right-wing populist party is expected to win power in April and May 2027. That party will slash spending, which will pacify the bond market and let France muddle through. This contrasts with the US, where deficits are rising under a shift toward more spending.

“and the result in April and May next year is that a right wing populist party will come into power and actually will slash spending, which will pacify the bond market and enable France to sort of muddle through.”at 22:16

Matt Gertken · BCA Research

The US must raise taxes after 2028 because its tax revenue to GDP is the lowest in the OECD.

US budget deficits are large and growing, and the only realistic way to handle them is raising taxes. US tax revenue to GDP is the lowest among OECD countries, leaving room for increases. Trump won't allow tax increases in 2027 and 2028, so the bond market may not be pacified until after 2028, when tax increases are expected to be the solution, much as France's bond market is being handled by spending cuts.

“So that means that the only way The US can deal with this is by raising taxes. And in fact, we have low taxes, low tax revenue to GDP, lowest in the OECD countries.”at 22:49

Matt Gertken · BCA Research

US bond yields will keep rising short term, with turmoil lasting about two years before tax hikes.

The US has a large budget deficit and rising spending from the midterm shift toward Democrats. France shows how the bond market can riot when deficits are not addressed. In the short term, US bond yields are expected to keep rising. The US will eventually calm the bond market by raising taxes, but the midterm result does not create that tax revenue increase, so the US may face about two years of bond market turmoil before a solution.

“In the short term, for sure. ... America will eventually control its bond riot through raising taxes, but we might have two years of turmoil before we get to that solution”at 23:24

Matt Gertken · BCA Research

Trump will hold tariffs near 10% rather than raise them, since broad tariffs are unpopular.

About 70% of voters oppose tariffs, and Hispanic voters and farm states like Kansas and Iowa are especially hurt by inflation, deportations and retaliation. Trump has executive authority over tariffs, and the Supreme Court will strike some but not all, since others rest on older trade laws. Gertken expects Trump to defend the current policy but not raise tariffs much beyond random occasions, leaving the effective rate around 10% over the next two years.

“I would say he'll effectively leave it at 10% where it stands. He'll defend what he's done, but he won't raise tariffs very much other than a few, you know, random eccentric occasions.”at 24:51